KMX

CarMax Inc

Consumer, Industrial/Transportation


Presented:10/19/2016
Price:$50.83
Cap:$9.84B
Current Price:$73.67
Cap:$11.41B

Presented

Date10/19/2016
Price$50.83
Market Cap$9.84B
Ent Value$22.20B
P/E Ratio16.5x
Book Value$16.03
Div Yield0%
Shares O/S193.62M
Ave Daily Vol2,112,100
Short Int12.12%

Current

Price$73.67
Market Cap$11.41B
CarMax, Inc. is as a holding company, which operates as a retailer of used vehicles and wholesale vehicle auction operator. The company operates through the following segments: CarMax Sales Operations and CarMax Auto Finance. The CarMax Sales Operations segment consists of all aspects of the auto merchandising and service operations, excluding financing provided by CarMax Auto Finance. The CarMax Auto Finance segment provides vehicle financing through CarMax superstores. It also offers financing solely to customers purchasing vehicles at CarMax, and offers qualifying customers an array of competitive rates and terms, allowing them to choose the one that best fits their needs. The company was founded by Richard L. Sharp and William Austin Ligon in September 1993 and is headquartered in Richmond, VA.

Publicly traded companies mentioned herein: CarMax Inc (KMX)

Highlights

The presenter sees two distinct risks as likely to weigh on CarMax (KMX) shares over the next 12-24 months and he is short the stock in the mid-$50s. While KMX is a “reasonably well-run” business, he believes that its results are elevated due to “twin bubbles” in the auto and fixed income markets that have been fueled by extraordinarily low rates. The low level of rates has led to record levels of auto credit extension, record SAAR, and record used car pricing (the latter being KMX’s specialty). Financing represents roughly 40% of KMX’s earnings and this is at risk. Additionally, a “massive” amount of off-lease vehicles will be coming to market; and 15% of gross profit is attributable to high margin warranties. If his assessment of the situation proves to be accurate, gross margins will “crack” over the next 12 months and KMX shares could trade down to the mid-$30s (14x $2.50 of EPS in 2017).

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Idea Discussion

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